Saturday, April 23, 2022

Dean Dennis' presentation to the STRS Board April 21, 2022 re: STRS investment costs

Dean Dennis is a retired teacher from the Cincinnati Public Schools; a member of Cincinnati Local 1520-R; a moderator for the Facebook group Ohio STRS Member Only Forum; an ORTA SW Regional Liaison and an STRS Ohio Watchdogs (Facebook) administrator. His strong activism on behalf of retired and active teachers is most noticeable in his leadership in the movement to bring change to the management of STRS, to restore our COLA and to bring transparency, integrity, fairness and honesty to our pension system.


Dan MacDonald reports on the April 21, 2022 STRS Board meeting: the good, the bad and the ugly


Robert Walters and I attended the STRS April 21 Board meeting. I hope you listened in; I hope you had on your “thinking caps.”  

After the usual opening of minute’s approval, the agenda was altered to add a presentation by Executive Director William Neville on “Indexing Comparison.” Neville praised the Investment Department for putting together a tremendous report. Neville produced charts that showed the in-house investment team beat the S&P 500 and Russell 3000 in Funded Ratio and Market Value from 1999 -2021. [This presentation was in response to two retirees who continually hammer the Board during Public Participation that DOW and/or the S&P 500 over the long term would place more money into the General Fund.]  Board members Rudy FIchtenbaum and Wade Steen requested the data used to produce the charts. 

The Investment Department reported March’s total fund returns at plus 1.04% and preliminary FY22 total fund return estimated at plus 4.13%, with investment assets ending March at approximately $95.6 billion, higher by $800 million since June 30, 2021. The department also adjusted interest rate ranges up because of the Fed’s inflation intervention; 10-year U.S. Treasury Note yields have increased. 

There was a review of the Statement of Investment Objectives and Policy and the Statement of Fund Governance. Most changes related directly to the Asset-Liability Study. Investment presented on Commission Comparison and explained why STRS costs are higher than OPERS – “different implementation styles.” Comparisons were also made to CalSTRS, Texas Teachers, and Virginia Retirement, all much cheaper, BUT [isn’t there always a “But” with STRS?], suggesting cents per share is not a good measure of trading cost. Several examples were given and pointing-out that passive management doesn’t require “much research.” 

The final slide of this presentation was titled “Is This Meaningful?” which showed 5-years vs OPERS that STRS added $1.2 billion and 5-years vs Russell 3000 Value added was $1.1 billion with a closing comment that your in-house Investment Department has “delivered on its promise.”  

The closing presentation, which was great and enlightening, [really, not sarcastic] was on the Trading Desk Overview. Rob and I had never heard this presentation. The 5th floor of STRS is a trading center, always connected to 50 countries' market centers. STRS is capable of trading 23 hours fifty-five minutes per day, in-house, or at the STRS traders' homes or by phone. Trades can be made by a “phone tree”, but most trades are done through a computer order management system which quickly checks compliance and cheapest trade costs and other needs. I am sure you will be happy to know that the investment staff, IT and senior staff can do their personal trading through the system. [How about that, another perk.] 

The Benefits Department presented next. Proposed 2023 plan coverage changes were made and voted accepted. In the Non-Medicare plan there is a current $20 copay to your PCP for the first two visits and then 20% coinsurance for all future visits. This was changed to $20 copay each visit, saving about $9 per visit to subscribers. In Medicare and non-Medicare plans, the drug maximum out-of-pocket was decreased to $4,000. 

With this change there is also a change in Medicare enrollees to Express Scripts’ Medicare Preferred Value & Broad Performance Medicare Network. 4,294 enrollees will be positively impacted by this since their non-preferred pharmacy will become preferred and 4,102 enrollees will be negatively impacted as their preferred pharmacy moves to non-preferred status. STRS wants you to know that 98% of the negatively impacted live within three miles of a future preferred pharmacy. Medicare Part B reimbursement continue but will appear differently on pension statements. New, all Survivor recipients and survivor annuitants will receive the Medicare Part B reimbursement. Again, these changes will not happen until January 1, 2023. 

The STRS Health Care Fund funded ratio is 193.49%. Not voted but under consideration, STRS proposed to increase the premium subsidy to 2.2% per year of service, capped at 30 years. Projected premium costs would be lower for 94% of enrollees. All this info will appear during Open Enrollment, months away. The process of change and information starts now. 

[An interesting aside to the Benefit Department report was Fichtenbaum bringing up that he is on the Health Committee and shouldn’t the changes be brought up there and who decides the recommendations? The Health Committee has not met in years. Board member Arthur Lard, who chairs the committee, stated STRS does a fine job and there was no reason for the committee to meet. When I was an active, I sat on my district’s health committee that met at least semi-annually, there was always a lot to discuss. Lard is a perfect example of a status quo Board member. Fichtenbaum asked, then, how to propose a change in health benefit coverage not presented by staff. Answer, give the Benefit Director a call. So much for working committees.]  

Executive Director Neville Report reviewed 6 areas including the “Auditor of State’s Top Rating for Transparency” for second year. All 6 areas, good news. Price asked about Keith Faber audit and Siedle lawsuit. The audit continues and the lawsuit has recently been dismissed. Five retirees and one active spoke during Public Participation. All spoke to displeasure of the Board and/or staff.   

The Finance Department presented the proposed 2023 Budget with significant increases in Compensation, a 6% increase, and Fringe Benefits, a 5.5% increase. Overall, the proposed operating budget has a 4.9% increase. Salary and wages include a 3% merit-based pay raise. [An annual event going back to the 90’s, we think]. When questioned by a Board member, over 95% of the staff receives this merit-based raise. The Wage and Salary 6 percent increase in the budget was blamed on 27 pay periods, “which is a product of being a bi-weekly employer and occurs every 10-11 years.” According to STRS, the 27th pay accounts for $2.1 million of the $2.6 million increase. [OK teachers, help us out.]  A 27th check should be cost neutral. STRS staff are mostly salaried employees, not hourly compensated. 

Salaried employees are paid by the salary year. In 2018 the STRS assistant director of investment earned $367,480. That is, he/she’s salary. It was divided by 26 pay periods. In my estimation, if that was he/she's salary now, it would be divided by 27 pay periods for the salaried year. Yes, bi-weekly pay would go down, but the pay periods increase by one, cost neutral. STRS appears to be issuing an entire extra pay PLUS a 3% merit-based raise. When a 27th check hits in your district, did the district just add an additional check to you? No, your bi-weekly pays were reduced. Your pay calendar also ran between two years. You were paid August or September thru July or August. STRS needs to fully explain why the 27th check needs an extra $2.1 million dollars and is not cost neutral. A year is a year is a year, even if every 10-11 years there is a quirk in the pay periods.  This should not be a bonus year, a “thirteenth check” to staff so to speak. The same goes for fringe benefits, fully explain the 5.5% increase.]  

The meeting ended with Routine Matters. Under new business Fichtenbaum and Steen made suggestions about Public Participation that were shot-down and about building/meeting access to actives which were shot down.    

The next Board meeting is May 19th. Rob and I would encourage actives to mark calendars and attend the June 16th meeting, in person, in Columbus. Usually, July does not have a meeting and many actives will be back to work by the August 18th meeting. Actives’ words need to be heard. Retirees are always invited to join us in Columbus.   

Rob Walters & Dan MacDonald 

Edward Siedle: STRS has NOT submitted all the information I asked for

Edward Siedle to John Curry

Apr 23, 2022

STRS has said that they have given me all the information I asked for, my case has been dismissed and the only remaining issue is legal fees. That is simply not true.
With respect to the intial lawsuit for CEM documents, the request for documents was initially denied by STRS but STRS later provided the documents to me. As a result, the case was dismissed but the suit for STRS to pay my legal fees remains unresolved.
With respect to the far more significant lawsuit for alternative investment documents, none have been provided. Not a single document. This case is ongoing.
Finally, according to my attorneys, Marc Dann and Andy Engel, additional lawsuits for STRS public records will be filed in the future

Friday, April 22, 2022

Governor DeWine makes official statement supporting STRS special audit

April 22, 2022

Fix My Pension Fund  3000 E Main St #278  Columbus, OH 43209

Link to the Public Participation speeches at the 4/21/22 STRS Board meeting

Dan MacDonald's speech to STRS Board 4/21/22: the staff should be included in the pain

Good morning.  I am Dan MacDonald, an STRS retiree with 38 years of service in Cleveland Heights – University Heights City Schools, plus some retired/rehire years. 

STRS is working on its 2023 Budget.   I implore the Board to not have merit-based pay raises this year.  Since 2017 thru 2021, inflation has been calculated at 14.5%.  During those years, most STRS staff have received, on average, a 3% raise. I am not talking PBI’s; I am addressing merit-based pay increases by department. STRS and the Board make it clear when dealing with actives and retirees’ members, that everyone should feel the pain or exaltation. Since this pension plan is funded by member moneys, I  think the staff should be included in the pain. Additionally, when the PBI Policy comes under scrutiny, I think the language around 5-year smoothing should be removed. Either meet the benchmark every year, or like the rest of us, hurt. I would also suggest that the benchmarks be further discussed. Either beat 7% or do not issue an incentive. Since we have a dynamite in-house investment team that never reports losses, at least in public sessions, either beat the 7 percent set by the Board, or live on a 3% merit-based raise which, as stated, should not be part of this year’s budget.

Additionally, 4 of my members over the past 6 months, have been involved with the denial of rehab services while in a rehab facility. AETNA probably based denial on non-progress. HPIAA blocks total understanding. Rehab facilities sent one home because there was a safety plan that could be met at home, the other three were charged over $14,000 plus for a month’s “housing”, nice word, right? One is still being charged in retroactive costs because a safety plan can’t be made and therefore he/she can’t be released.  Another’s daughter became the premier advocate questioning everyone and everything and ultimately received reimbursement when discovering paperwork was not properly filed as the paperwork was not submitted. The Benefit Department should design and present educational seminars on the ins-outs of health plan coverages and non-coverages. In the best of circumstances, Medicare covers fully only the first 20 days of rehab, then 80% for the next 80 days, then costs are on the individual. Actives need to know. There is an STRS push to not rely totally on pension moneys, there needs to be a similar push to not totally rely on health insurance plans.

I am running out of time; this needs to be further addressed.  Retirees find out their costs are not being covered days before the cut-off.  An Appeal is made; denied; reappealed….all in the midst of stress from injury.

Actives need their benefits enhanced beyond the elimination of an age requirement and retirees need a permanent COLA.  Thank you.

Thursday, April 21, 2022

STRS Staff Seek 6% Raise

Ohio teachers in attendance were stunned when the STRS Ohio staff formally requested a 6% raise and a 27% increase in their bonus. 

News has been spreading that STRS Ohio staff are paid the highest in the country; they have luxury perks working in a "golden palace"; and while our pension is under-performing, they request a raise??? 

Additionally, they requested an increase to every perk they already receive. 

See chart below:

Deliberate deceitfulness on the part of STRS exposed by Robin Rayfield

From this month's ORTA Newsletter 

April 20, 2022

STRS Report to ORTA members 

By Robin Rayfield

The STRS board will meet on April 21. Since the COLA issue was resolved in the March meeting, I suspect that the business will involve reports from the financial the department and from the investment department. Currently, the board of trustees at STRS are divided along two separate camps. One camp is committed to maintaining the current status quo that includes suspension of COLA and providing a pension that is worth less than the individual’s contribution. Those are the incumbent members of the board. The other camp includes Dr. Fichtenbaum and Mr. Steen. These board members are committed to making changes at STRS that will lead to a pension that is commensurate with the contribution rate members pay and also includes a commitment to a COLA for retirees.
Remember, ORTA endorsed the following candidates for the election that is taking place this month:
Retiree candidate = Elizabeth Jones
Active member candidates = Steven Foreman and Julie Sellers
STRS members recently received correspondence from STRS that refutes the claim made by ORTA and many others that active members receive .77 cents on each dollar that they contribute. I will attempt to explain ORTA’s claim of .77/dollar contribution rate. All pensions (STRS included) provide a calculation called the ‘normal cost’. This normal cost provides the members with the ‘value’ of their pension. STRS calculated and publishes that the normal cost of an STRS pension is 10.8%. You can find that figure in STRS literature, (most notably in the ACFR). Knowing that the contribution rate for STRS members is currently 14% and the ‘value’ or normal cost is 10.8% we know that the actives currently pay 14% for a 10.8% benefit. If you divide the normal cost (10.8) by the contribution rate (14) you get .77. Thus, members get 77 cents on the dollar. Boston College ranks public pensions across the country. STRS Ohio is the ONLY public pension that has a normal cost less than the contribution rate. STRS knows this and also knows that it is deceitful to tell people otherwise. Of course, they will not admit that STRS retirees and actives have the worst deal in America.
Dr. Robin Rayfield is Executive Director of the Ohio Retired Teachers Association (which is also open to active teachers) and an outspoken advocate for ALL teachers, active and retired, where STRS matters are concerned.

Wednesday, April 20, 2022

Ohio Governor DeWine Supports Special Audit Of Ohio Teachers Pension Spurred By Retiree Forensic Investigation


By Edward Siedle

April 20, 2022

Today Ohio Governor Mike DeWine issued the following statement in support of a Special Audit of the $100 billion State Teachers Retirement System (STRS) Ohio Auditor of State Keith Faber and his office is currently conducting.

“This week, I spoke with Auditor Faber regarding his ongoing special audit of STRS. The issues being reviewed are of real importance to Ohio teachers and retired teachers: the transparency of the pension system, investment costs and fees, and the impact of cost-of-living adjustments. I am supportive of the Auditor’s efforts, and I look forward to the findings of the special audit. I am also encouraged by recent actions of the STRS Board to begin to address cost-of-living concerns.”

As I wrote last October, a forensic investigation commissioned by 19,000 retirees participating in the State Teachers Retirement System of Ohio spurred the Special Audit by the State Auditor.

In a letter dated October 11, 2021, Keith Faber, the Auditor of the State of Ohio informed the Executive Director of the $100 billion State Teachers Retirement System of Ohio that his Office had received numerous complaints evolving from a report issued by my firm, Benchmark Financial Services, Inc. titled The High Cost of Secrecy: Preliminary Findings of Forensic Investigation of State Teachers Retirement System of Ohio, Commissioned by the Ohio Retired Teachers Association.

“The information obtained to date supports a reasonable basis for conducting a special audit,” said the Auditor.

The findings of the Benchmark report included that STRS had long abandoned transparency; legislative oversight of the pension had utterly failed; Wall Street may have been permitted to pocket lavish fees without scrutiny as to legitimacy; disclosure of investment costs and performance may have been misrepresented, as billions that could have been used to pay teachers’ retirement benefits had been squandered.

Read the rest of the article here.

Edward Siedle: Ohio Teachers Pension Investment Cost Disclosure Is More Confusing Than Ever

By Edward Siedle

April 20, 2022
The deeper you dig into the investment costs state and local pensions disclose, the more questions arise. It’s confusing to even the most sophisticated investors.

It’s common knowledge that sponsors of retirement plans have a fiduciary duty to ensure the fees their plans pay Wall Street money managers for investment advice are reasonable.

Fees paid for investment services have always been an important consideration for fiduciaries of corporate pensions governed by the federal Employee Retirement Income Security Act (ERISA).

State and local government pensions are exempt from ERISA and are lightly governed by state law. However, because ERISA and state law protections both stem from common law fiduciary and trust principles, best practices for public pensions are frequently similar to those found in ERISA.

At the outset, sponsors of public, as well as corporate retirement plans must take steps to understand the sources, amounts, and nature of the fees paid by their plans, as well as the related services performed for such fees. After all, a plan sponsor cannot determine the reasonableness of fees paid without a comprehensive understanding of the plan’s services and fees.

The shift by public pensions into more complex so-called “alternative” investment vehicles, such as hedge, private equity and venture funds, as well as fund of funds, has brought dramatically higher investment fees—fees which are more much more difficult for pensions to monitor. Disclosed fees, as a percentage of assets, have increased by about 30 percent over the past decade, as use of alternative assets has more than doubled since 2006.

In addition, public funds are paying more than $4 billion annually in unreported fees associated with alternative investments, according to Pew Charitable Trusts. The hidden costs of private equity investments – which include carried interest, monitoring costs, and portfolio company fees – were not reported as investment expenses among most of the 73 large public funds Pew examined, according to a 2017 report from the non-profit group.

More disturbing, a recent internal review by the SEC found that a majority of private-equity firms, inflate fees and expenses charged to companies in which they hold stakes. More than half of about 400 private-equity firms that SEC staff examined charged unjustified fees and expenses without notifying investors.

So, pensions which choose to gamble in asset classes—such as private equity funds— specifically cited by regulators for charging bogus fees in violation of the federal securities laws must establish heightened safeguards to ensure that all fees paid to such managers are properly reviewed and determined to be legitimate, as well as fully disclosed to participants. They’ve got to be especially careful.

CEM Investment Benchmarking is a private Canadian company which many state and local government pensions in the U.S. retain to annually analyze their investment costs and performance.

According to a recent Summary of the Oversight of the State Teachers Retirement System of Ohio:

“CEM Investment Benchmarking annually presents a report to the board comparing STRS Ohio’s investment costs and performance to those of our peers. The report consistently shows STRS Ohio’s performance ranks in the top 25 percent of our peer group and our investment costs are low compared to our peers.”

In my opinion, the above summary disclosure by this pension regarding CEM findings may, at a minimum, be so incomplete as to be potentially misleading. I believe disclosure of the full 136-page CEM report, not merely the Executive Summary or Key Takeaways section, is necessary for pension stakeholders to form a complete understanding of CEM’s findings.

The information CEM provides to pensions, their stakeholders and other investors globally relates to the investment performance and cost of $15 trillion in participating assets. CEM acknowledges:

“We provide our clients with objective, actionable benchmarking insight into how to maximize value for money in investments and pension administration.”

“Our reports and insights provide actionable insights and are used strategically as well as to help meet fiduciary responsibilities.”

In other words, both pensions and stakeholders rely upon CEM findings, as disclosed, in evaluating and executing investment strategies. The cost information the firm provides is intended to, and does, impact the investments pensions select because costs are understood to materially impact performance.

For this reason, I believe it is appropriate for legislators, regulators, law enforcement and pension stakeholders to examine whether the investment cost and other information disclosed to pension stakeholders by the firm and its pension clients is accurate, as well as fully and fairly presented.

When I recently requested information from STRS Ohio related to CEM’s contract, reports and analyses, I was told by STRS legal counsel there was no contract, or any other form of agreement between the pension and CEM. That was surprising to me given that the contract relates to over $90 billion in assets; the duties of the parties to the contract are complex; and any errors or misunderstandings between the parties could have a huge impact upon the pension. The documents I did receive were substantially redacted at the request of CEM.

CEM’s explanation of their redactions was:

The redactions have been made in line with the definition of “Trade secret” as defined in Ohio Code 1333.61 Uniform trade secrets act definitions as follows:

(D) "Trade secret" means information, including the whole or any portion or phase of any scientific or technical information, design, process, procedure, formula, pattern, compilation, program, device, method, technique, or improvement, or any business information or plans, financial information, or listing of names, addresses, or telephone numbers, that satisfies both of the following:

(1) It derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use.

(2) It is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

We have redacted our cost data as well as certain formulas and methods used in the preparation of the report. The information that has been redacted is not publicly available and is only provided to our paying clients. The redacted cost data has been provided to us by our clients and forms our proprietary cost database. This data and database is not available from other public sources and forms the basis for our analysis. It is key to our business model that the data not be publicly released. Note that I have not redacted return information since 1) much of this data could be gleaned from publicly available sources (CAFRs) and is not core to our product."

Apparently, all redactions were made or demanded by CEM and the pension neither confirmed nor disputed CEM’s rationale for its redactions. Conspicuously redacted from the reports were the identities of the public pension funds that CEM chose as STRS’s peers for cost and performance comparison. CEM also redacted data about STRS’s performance, including investment costs, external money manager fees, and performance information on STRS’s investments.

CEM offered no explanation as to how it could claim that STRS’s own internal data can be CEM’s “trade secret.”

Since I believe public pensions should be facilitating, not thwarting, transparency and compliance with Ohio public records laws, on May 21, 2021, I filed a complaint for writ mandamus with the Supreme Court of Ohio seeking the STRS public records related to CEM. Later, immediately following an initial mediation, STRS finally provided the CEM documents I had requested in full—now without any redactions.

Here’s what I could gather from the unredacted, formerly “trade secret” protected, reports.

It is my understanding that clients provide the firm with all of the data regarding the pension investment costs and performance, which CEM analyzes. Indeed, CEM acknowledges in the language above that “the redacted cost data has been provided to us by our clients and forms our proprietary cost database.”

“The analysis is as accurate as possible based upon fees as reported to us by our clients (emphasis added),” says CEM.

However, in interviews CEM representatives advised me:

  • Pensions may not know the costs of all their investments;
  • Pensions may decline to provide CEM with known cost information which pensions are not “overly comfortable with;”
  • CEM does not independently collect any cost information from investment managers which might verify or contradict the fees as reported by pension clients; and
  • Cost and performance estimates created by CEM have been utilized with respect to many pension investments.

The CEM reports I have reviewed stated that the information contained therein is proprietary and confidential and may not be disclosed to third parties without the express written mutual consent of both CEM and STRS. While the reports repeatedly state that the most meaningful comparisons for returns, value added and cost performance are to “your custom peer group,” it is noted: “To preserve client confidentiality, given potential access to documents as permitted by the Freedom of Information Act, we do not disclose your peers’ names in this document.” In other words, information which is critical for assessing the value of the peer group analysis has been intentionally withheld from the document to avoid potential disclosure of said information to the public under applicable state law.

In my opinion, there is no valid reason a single U.S. public pension, let alone “custom peer groups” of such funds should agree to provide in-depth, “sensitive” financial information related to trillions in public assets to a private investment services company—for purposes of analyses supposedly prepared for the benefit of, and certainly paid for by, the U.S. funds—and further agree to withhold the details of said analyses from pension stakeholders. After all, the information provided to CEM relates to stakeholder money.

At least one other state pension, South Carolina, has rightly released its entire 136-page CEM analysis to the public. Thus, it appears any supposed concerns regarding the proprietary and confidential nature of information contained in CEM analyses are not insurmountable.

Further, the December 2018 Final Report and Recommendations of the Public Pension Management and Asset Investment Review Commission of the Commonwealth of Pennsylvania recommended that the Commonwealth’s two largest pensions collaborate on a detailed CEM administrative and investment cost benchmarking analysis, and make the detailed report(s) available to the public (not only the Executive Summary).

In Pennsylvania and South Carolina, unlike Ohio, there is recognition that the public deserves to see the entire CEM report, not select passages.

Failure to disclose names of pensions in the custom peer group renders the peer analysis unauditable. Worse still, pension stakeholders cannot even be certain that disclosure of the names in the custom peer group was made to, as well as understood and accepted by, the STRS board consistent with the board’s fiduciary duties. To further complicate matters, CEM notes—without explanation—that the STRS peer group may change from year-to-year.

Paradoxically, according to CEM itself, “in every other country in the world, pensions—such as Canada’s largest pension, the $221 billion Ontario Teachers’ Pension Plan—willingly disclose their custom peer groups (emphasis added).” Only American public pensions, subject to expansive state open records laws, demand secrecy, CEM representatives told me.

In summary, if favorable summaries of CEM analyses are to be happily announced to U.S. public pension stakeholders—for the American public to rely upon—then I believe there should be no hesitancy in disclosing the underlying data and documents supporting those conclusions.

In support of my views regarding the importance of transparency, I noticed that CEM says the following in its reports: “The value of the information contained in these reports is only as good as the quality of the data received.” If the public cannot see the underlying data, then it is impossible to assess its validity.

CEM’s website unequivocally states that “Transparency Matters.”

Says CEM’s Mike Heale: "Trust is a critically important success factor. Transparency builds trust. Transparency is the right thing to do and the smart thing to do.”

Indeed, CEM offers a custom Transparency Benchmarking Service for funds which it claims “helps funds speed up the implementation of transparency best practices and builds a great foundation for transparency leadership in our industry.”

On the other hand, the firm’s website includes numerous assurances to clients regarding confidentiality.

Preaching transparency while promising confidentiality may be problematic, in my opinion.

The unredacted STRS Ohio 2018 report I reviewed initially states in the Key Takeaways section of the Executive Summary that the pension’s 5-year net total return of 6.25 percent was in the top quartile and above the fund’s 6.09 percent 5-year policy return. The 5-year net value added was 0.16 percent. As noted by CEM, “Total returns, by themselves, provide little insight into the reasons behind relative performance. Therefore, we separate total return into its more meaningful components: policy return and value added.” Policy return is the return a pension would receive if it passively invested its assets i.e., bought appropriate index funds. Value added indicates the extra return provided by active management.

A footnote later in the report discloses that “to enable fairer comparisons, the policy returns for all participants except your fund were adjusted to reflect private equity benchmarks based on lagged, investable public-market indices. If CEM used this same adjustment for your fund, your 5-year policy return would be 6.8 percent, 0.7 percent higher than the pension’s actual 5-year policy return of 6.1 percent. Mirroring this, the 5-year total fund net value added of 0.16 percent would be 0.7 percent lower” or, by my estimate, -0.54 percent.

In other words, a fairer comparison (says CEM)—not included in the Key Takeaways—reveals that the pension underperformed its 5-year policy return, producing a negative value added—the very two components of the pension’s total return which CEM claims are more meaningful. A negative net value added means that the pension did not benefit from active management, i.e., STRS would have earned over $400 million more annually, or over $2 billion for the five-year period by simply passively indexing its investments according to its policy mix. These findings are strikingly different from those announced by STRS, in my opinion.

The Key Takeaways section of the CEM report also states that the pension’s investment cost of 40.1 basis points was below its benchmark cost of 54.5 basis points which suggests that the fund was low cost compared to its peers., i.e., was low cost because it paid less than its peers for similar services and had a lower cost for implementing its style.

The report later states that the investment costs were $279.1 million or 36.9 basis points and $302.8 million or 40.1 basis points when hedge fund performance fees and private equity base management fee offsets were added. However, it is disclosed that transaction costs and private asset performance fees were not included in the latter total.

The report indicates that CEM excluded external private asset performance fees and all transaction costs from the pension’s total cost because “only a limited number of participants were able to provide complete data.” In other words, either most of the 17 unnamed U.S. public pensions included in the custom peer group failed to diligently monitor the complete fees paid related to these high-cost, high-risk opaque investments, i.e., did not know the complete costs, or the pensions were aware of the complete fees but refused to disclose them—either of which would serve to reduce each pension and the group’s overall costs reported to CEM.

In Appendix A, performance fees of $160.8 million are estimated by CEM in 2018. This figure is a mere estimate provided by CEM, as an accommodation to its pension clients and without confirmation from the investment managers. In my opinion, the default fees (which are based upon pension reported medians) are likely underestimates.

Appendix A- Data Summary: Comments and defaults, is an extensive list of base and performance fee default cost estimates applied by CEM to 75 of the Ohio pension’s investments over the period either because (according to CEM):

  1. STRS did not provide cost information to CEM; or
  2. STRS failed to provide support for the unusually low-cost information reported to CEM; or
  3. To enable CEM comparisons of the total cost of different implementation styles.

These base and performance fee default costs are significant—some in excess of 2 percent.

Unlike the base fee estimates, the performance fee estimates “are not included in the pension’s total fund cost or in benchmark analysis,” says CEM. It is unclear to me why these default costs are not included. Obviously, failure to include the significant performance fee default costs in the pension’s total fund cost or in benchmark analysis—for whatever reason—serves to make the pension appear lower cost and more competitively managed.

In my opinion, if, during the data confirmation process CEM and the pension discussed the disturbing fact that certain investment management costs were unknown to STRS, or, worse still, known but not provided for some reason, the sole acceptable, prudent course would have been to demand full disclosure of all costs from the pension and its managers, as opposed to continuing to invest billions in the highest-cost, highest-risk, most opaque assets blithely ignorant of (or concealing) the true costs—using problematic median default estimates as support for the strategy.

Again, pension fiduciaries have a legal duty to monitor all investment and other costs for reasonableness—not merely guess, or estimate, what those costs might be.

Use of median default estimates in managing a $90 billion plan securing the retirement of hundreds of thousands of state teachers fails to meet applicable fiduciary standards, in my opinion.

True costs are always ascertainable and should always be used in order to safeguard assets.

When performance fees of $160.8 million are added in, the revised fee total rises from $279.1 million, then $302.8 million to $463.6 million or 61.3 basis points, versus the 40.1 basis points noted in the Key Takeaways. This cost is significantly greater than the fund’s benchmark cost of 54.5 basis points, suggesting that STRS was high cost compared to its peers, i.e., paid more than peers for similar services and had a higher cost for implementing its style. Again, these findings appear to be strikingly different from those announced by the pension.

However, it appears that even the $463.6 million estimated total cost is incomplete.

In 2015, CEM concluded that the difference between what pensions reported as expenses and what they actually charged investors averaged at least two percentage points a year. And this estimate, CEM acknowledged, was probably low. CEM has stated private equity fund of funds costs average over 5 percent. Professor Ludovic Phalippou, at the Said School of Business at Oxford, found that the average private equity buyout fund charged more than 7 percent in fees each year.

More recently, in 2020, CEM concluded that pensions are reporting, at best, only half of their investment management costs.

“Our research indicates that, at best, only half of true total investment management costs are included in asset owner financial statements. Across the industry this means an enormous amount of costs actually incurred go unreported. Tens of billions of dollars are not reported by asset owners.”

“We believe our estimate that 49 per cent of costs go unreported in financial statements of annual reports is conservative and the extent of under-reporting is likely to be higher across the entire industry.”

My forensic investigations routinely uncover fees related to alternative funds and fund of funds in the 7-10 percent range. My 2014 forensic investigation of the $87 billion State Employees’ Retirement System of the State of North Carolina revealed that the pension paid undisclosed fees approximately $500 million, in addition to the $500 million in fees it disclosed.

In my opinion, there is ample reason to believe the total fees at STRS are nearly double what the pension is reporting, amounting to almost $1 billion annually.

More disturbing, since STRS investment managers may withdraw their fees from pension accounts in the absence of any diligent monitoring by STRS, the risk of looting, i.e., illegitimate withdrawals, is dangerously high, in my opinion.

There is no point speculating as to the true all-in investment costs at any pension, in my opinion. Absent an accounting and full transparency, pension stakeholders can never be certain of the true costs; with scrutiny, the true costs can be precisely determined and publicly disclosed, consistent with applicable fiduciary duties—restoring financial integrity to the pension.

As CEM notes in a private equity whitepaper, cost disclosure and transparency can lead to better decisions. Says CEM:

“Clearly there currently are challenges with collecting full private equity costs, but the exercise can yield benefits beyond improved disclosure and transparency. Understanding true costs can lead to lower costs through negotiation with managers. Additionally, understanding costs may lead to more efficient investment vehicle selection because high costs will materially impact private equity performance.”

In conclusion, there is never any justification for a pension to fail to demand full disclosure of fees from investment managers since failure to understand true costs may lead to less efficient investment vehicle selection and negatively impact performance. Pension participants and taxpayers deserve to know the truth. Like I said earlier… it’s stakeholders’ money.

Likewise, there is never any justification for a pension to fail to provide full disclosure of fees to stakeholders. Public pensions investing public monies must be accountable to the public.

Larry KehresMount Union Collge
Division III
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